OREANDA-NEWS. Fitch Ratings has affirmed CBS Corporation (CBS) and its subsidiaries' Long-Term Issuer Default Ratings at 'BBB'. Fitch has also affirmed the specific issue ratings assigned to CBS. The Rating Outlook for CBS and its subsidiaries is Stable. A full list of ratings follows at the end of this release. CBS had approximately $8.4 billion of debt outstanding as of June 30, 2016.

The affirmation follows the company's announcement that its board of directors reset its share repurchase authorization to $6 billion and increased the quarterly dividend 20% to $0.18 from $0.15 effective Oct. 1, 2016. The new share repurchase authorization is consistent with CBS's ongoing capital allocation strategy and Fitch's expectations. CBS's investment in content, programming and platforms holds the highest priority in terms of capital allocation.

The share repurchase authorization is in line with Fitch's expectations that CBS will gradually increase its debt and increase leverage to its target ranging between 2.5x and 2.75x, which corresponds with Fitch's 3.0x gross leverage target for the current ratings. CBS's content centric business strategy, which focuses on more stable and recurring revenue streams and positions the company to reduce its exposure to more volatile advertising revenues can, in Fitch's opinion, support the company's leverage target.

KEY RATING DRIVERS

--Outside of investing in its core businesses and growth initiatives, share repurchases continue to be the centerpiece of CBS's capital allocation strategy. Shareholder returns that exceed free cash flow (FCF) generation are incorporated into the current ratings to the extent that leverage remains below Fitch's 3.0x total leverage threshold.

--Fitch anticipates that CBS will maintain a rational approach to managing its balance sheet while increasing leverage to its target. Capital allocation will continue to prioritize investment in content creation and programming while preserving the historically conservative financial policy of its capital structure in the context of its leverage target and participating in merger and acquisition activity.

--Growing content licensing and distribution, affiliate and subscription revenues are improving CBS's revenue mix and are in line with the company's long-term objective to increase non-advertising revenue sources. However, CBS's exposure to advertising revenues at 50% (approximately 45% excluding CBS Radio) is relatively high compared to other diversified media companies.

--CBS expects that its retransmission consent/reverse compensation revenue will surpass $1 billion during 2016 (versus 2017 previously expected) and to grow to $2.5 billion by 2020. This revenue stream provides a stable and recurring element to CBS's revenue base, which mitigates some of the volatility associated with advertising revenues. Additionally, the high margin characteristic of these revenues strengthens the company's operating profile.

--Fitch expects that CBS will structure the anticipated split-off of its Radio business in a leverage neutral manner and that the company's financial policy, namely its commitment to a leverage target of between 2.5x - 2.75x, remain unchanged. Fitch anticipates that the majority of proceeds received by CBS in connection with the radio divestiture will be distributed to shareholders and that the company will take steps to reduce debt to maintain leverage in line with Fitch's 3.0x gross leverage target for the current ratings.

--Rating concerns include an above-average exposure to cyclical advertising revenue and the company's capacity to adapt to ever-changing media consumption patterns, emerging distribution platforms, and technology evolution all of which will drive audience fragmentation and disrupt traditional media models. Additional concerns center on the company's ability to balance escalating programming expense and production costs with the requirement to consistently deliver programs that drive incremental share of an increasingly fragmented viewing audience while maintaining or expanding operating margins.

Radio Separation Strategically Sound

From Fitch's perspective, the potential divestiture of the radio business is aligned with CBS's content-centric business strategy, which focuses on more stable and recurring revenue streams and positions the company to reduce its exposure to more volatile advertising revenues. The company's exposure to advertising revenues declines to 45% pro forma for the divestment of its radio business from approximately 50% during the year ended Dec. 31, 2015.

The anticipated exit from the radio business would enable the company to focus on long-term revenue growth opportunities and de-risk its business model by reducing its exposure to volatile advertising revenues.

CBS initiated the process to divest CBS Radio by filling the

S-1 registration statement related to an initial public offering of its common stock. Fitch expects that CBS will own approximately 81% of CBS Radio following the IPO and will control the company until the final separation of the radio business. Similar to CBS' divestment of CBS Outdoor Americas, Inc., the company intends to complete the separation of CBS Radio by means of a tax-free split-off following the expiration of a standard lock-up period. In accordance with the split-off CBS will offer its stockholders the option to exchange their shares of CBS common stock for shares of CBS Radio's common stock in an exchange offer.

Creditable Path for Revenue Growth

Fitch believes CBS's plan to leverage its content-centric strategy and increase revenues by an incremental $3.75 billion through 2020 is reasonable. From Fitch's perspective CBS's core businesses are strong and position the company to successfully execute on its revenue growth initiatives. This anticipated revenue growth will serve to further diversify the company's revenue base and de-risk its business model.

The company intends to capitalize on its strong content position to drive long-term revenue growth in retransmission and reverse compensation and international distribution while capturing revenue growth opportunities presented by changing media consumption patterns and emerging devices with over-the-top video services, skinny bundles and monetization of time-shifted viewing.

Central to CBS's revenue growth plan is capitalizing on retransmission consent and reverse compensation revenue growth opportunities, including securing payment for out-of-home rights. Retransmission consent and reverse compensation revenues are among CBS' fastest growing revenue streams. Fitch's ratings incorporate the strong competitive position of the CBS television network and studio as well as largely stable demand for CBS's various advertising platforms. The broadcast network, owing to its ratings strength, is well-positioned to capture large viewing audiences amid an increasingly fractured media landscape. Fitch believes that demand for the television studio's content remains strong across all major end markets. Importantly CBS owns approximately 80% of its primetime schedule which supports its strategy to monetize its content across multiple platforms both domestically and internationally. Sport content rights are locked in for the next several years adding to the overall strength of the content portfolio. This robust content portfolio strengthens CBS's negotiation leverage with MVPDs and network affiliates relating to retransmission and reverse compensation negotiations.

International revenues generated through the licensing of content improve CBS's overall profitability and de-risks the company's overall production model. CBS's position as the owner of predominately all of its content (both CBS and Showtime {its original content}) and its ability to monetize this content within international markets (international syndication) will be the biggest driver of international revenues. Fitch believes there is growing appetite for premium content within international markets with more channels, platforms and buyers.

CBS has grown its international television distribution business to approximately $1.5 billion in revenues as of year-end 2015 from nearly $500 million as of year-end 2007. The company believes it can further expand its international revenues to $2.3 billion by 2020 representing $800 million of incremental revenues.

CBS believes OTT represents an $800 million revenue opportunity split between Showtime OTT and CBS All Access. CBS believes offering Showtime directly to households that do not subscribe to Showtime, in an OTT platform will capture incremental subscribers. Fitch believes the pricing and assumed penetration rates required to build $800 million of revenue are reasonable.

Leverage and Financial Policy

CBS's capital structure and credit protection metrics remain stable and within Fitch's expectations for the current rating. However, CBS's leverage target diminishes the capacity and financial flexibility the company has at the current rating level from Fitch's perspective. Fitch expects that CBS will continue investing in its core businesses and growth initiatives and support shareholder returns within the context of managing to its leverage target. CBS's ongoing investment in content and programming holds the highest priority in terms of capital allocation. Shareholder returns that exceed FCF generation are incorporated into the current ratings to the extent that leverage remains below Fitch's 3.0x total leverage threshold.

Fitch calculates consolidated gross leverage at 2.4x as of the latest 12 months (LTM) ended June 30, 2016 (2.6x pro forma for the $700 million issuance of 2.9% Senior Notes due 2027 in July. The company's leverage, pro forma for the CBS Radio split-off increases nominally to 2.7x as of the LTM period ended March 31, 2016 versus actual leverage of 2.5x for the same time-period. The pro forma leverage does not consider any debt reduction stemming from the proceeds CBS is expected to receive in connection with the split-off transaction. Fitch does acknowledge however that CBS is expected to use the cash proceeds to repurchase CBS common stock.

SHAREHOLDER RETURNS

Shareholder returns (dividends and share repurchases) totalled approximately $2.3 billion during the LTM period ended June 30, 2016 representing 147.9% of FCF before dividends. CBS repurchased approximately $500 million of its common stock during the second quarter of 2016; leaving approximately $1 billion of capacity remaining on its share repurchase authorization as of June 30, 2016. The authorization has subsequently been refreshed to $6 billion. Fitch expects the pacing of share repurchase activity during the second half of 2016 will be substantially similar to the first half of 2016.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--Low - to mid-single digit revenue growth is assumed within CBS's Entertainment segment. Revenue growth benefits from the broadcast of the Super Bowl in 2016.

--The base case further assumes a stable economic and advertising environment.

--Syndication revenues will continue to be variable and dependent on content availability. CBS is positioned to capitalize on its strong position in first run syndication (15 of the top 20 syndication shows), a solid pipeline of content coming to off-network syndication and incremental demand for content from OTT and SVOD providers.

--Cable Network segment revenue growth reflects the stability of the business and modest affiliation fee increases. The company's investment in original programming supports affiliation fee growth. Fitch anticipates mid-single digit revenue growth.

--Publishing revenues decline modestly in the base case reflecting the ongoing impact of digital migration.

--Local Broadcasting segment again incorporates a stable economic and advertising environment as well as the typical political advertising cycle. Additionally, the segment will benefit from growing retransmission consent revenues. These considerations are offset somewhat by continued weak CBS Radio revenue growth. Revenue growth ranges between 4% and -1% in the base case.

--From a margin perspective, the base case assumes modest margin expansion within the Entertainment segment reflecting growth in higher margin syndication and OTT and SVOD revenues. This is offset by higher content and programming costs.

--Cable Network margins are pressured due to increasing programming costs due to higher investment in original programming although this is offset by benefits from new distribution windows.

--Publishing margins increases modestly to reflect changing revenue mix to higher margin digital sales.

--Local Broadcast margins move in tandem with the political cycle.

--All debt is refinanced at maturity. Incremental debt issuance to support share buybacks and lever the balance sheet to the target over the ratings horizon.

RATING SENSITIVITIES

Positive rating action would likely coincide with CBS adopting a more conservative financial policy highlighted by a gross leverage target of 2.25x or lower. Moreover, Fitch needs to observe meaningful progress in CBS's efforts to transform its revenue mix and reduce its reliance on cyclical advertising revenues. Meanwhile, CBS will need to demonstrate that its operating profile can sustain itself amid ongoing competitive pressures, changing media consumption patterns and evolving technology platforms.

Negative rating actions are more likely to coincide with discretionary actions of CBS management including, but not limited to, the company adopting a more aggressive financial strategy which increases leverage beyond 3x or event-driven merger and acquisition activity that drives leverage beyond 3.5x in the absence of a creditable deleveraging plan.

Additionally, negative rating actions could result should Fitch begin to observe a negative impact from alternative content distribution platforms and other forms of entertainment that is significantly larger than our expectations. Other negative triggers include a weakening of the company's television studio's ability to produce desired television content, or secure programming on its television networks that consistently delivers viewing audience and related advertising revenues.

LIQUIDITY

The operating leverage inherent in CBS's business along with modest capital intensity enables the company to generate meaningful levels of FCF and provides the company with substantial financial flexibility. CBS generated approximately $1.3 billion of FCF from continuing operations (defined as cash flow from operations less capital expenditures and dividends), during the LTM period endedJune 30, 2016, which follows $901 million of FCF generation during the year ended Dec. 31, 2015. Going forward, Fitch anticipates that the company will consistently generate consolidated FCF in excess of $1.2 billion providing CBS with adequate flexibility with in the current ratings to accommodate its capital allocation policy.

CBS's liquidity position is strong and supported by $176 million of cash on hand as of June 30, 2016, $2.5 billion in available credit facilities (substantially all of which was available as of June 30, 2016, and expected FCF generation. CBS's revolver commitment expires on June 9, 2021. Scheduled maturities are well-laddered and manageable considering expected FCF generation, reliable market access and backup liquidity. Approximately 22% of the company's debt outstanding as of June 30, 2016 is scheduled to mature over the next five years, including $400 million in 2017, $300 million in 2018, $600 million in 2019, and $500 million in 2020.

FULL LIST OF RATINGS

Fitch has affirmed the following ratings with a Stable Outlook:

CBS Corporation (CBS)

--Long-Term IDR at 'BBB';

--Senior unsecured at 'BBB';

--Short-Term IDR at 'F2';

--Commercial Paper at 'F2'.

CBS Broadcasting, Inc.

--Long-Term IDR at 'BBB';

--Senior unsecured at 'BBB'.